Low-Income Families in Alabama Results from the Family Resource Simulator

About 85 percent of low-income children have parents who work,
and most have at least one parent working full-time, year-round.
Nonetheless, many of these parents are unable to afford basic
necessities for their families, such as food, housing, and stable
child care. Even a full-time job is not always enough to make ends
meet, and many parents cannot get ahead simply by working more. As
earnings increase—particularly as they rise above the
official poverty level—families begin to lose eligibility for
work supports. At the same time, work-related expenses, such as
child care and transportation, increase. This means that parents
may earn more without a family experiencing more financial
security.1 In some cases, earning more
actually leaves a family with fewer resources after the bills are
paid.

The
Family Resource Simulator, developed by
the National Center for Children in Poverty, illustrates how this
happens. This web-based tool calculates resources and expenses for
a hypothetical family that the user “creates” by
selecting city and state, family characteristics, income sources,
and assets. The user also selects which public benefits the family
receives when eligible and makes choices about what happens when
the family loses benefits (e.g., does the family seek cheaper child
care after losing a subsidy?).

The result is a series of charts that show the hypothetical
family’s total income from various sources as earnings rise,
as well as the cost of basic family expenses. Using the Simulator,
this report describes the experiences of two hypothetical families
in the workforce.

Low Income in Alabama: The Chases

The Chases live in Birmingham with two children, ages 3 and 6.
The federal poverty level for such a family is $18,850 per year.2 For simplicity, the
Simulator assumes that the Chases begin with no income; then one
parent enters the workforce and steadily increases hours to
full-time employment. After that, the second parent begins
part-time work and gradually moves into full-time employment. When
the Chases‘ employment requires outside child care, both
children go to child care centers (the 6-year-old goes after
school). The Chases pay payroll and income taxes on their earnings,
and when they qualify, they receive the federal Earned Income Tax
Credit (EITC) and Child Tax Credit. They also receive food stamps
and public health insurance coverage.

As the Chases‘ earnings increase, they quickly begin to
lose eligibility for the benefits that support work. At just $4,000
in annual household earnings, the parents no longer qualify for
public health insurance. This simulation assumes that the Chases
have insurance through an employer. In practice, employer-based
coverage is rarely available for part-time workers—most
low-wage workers do not have employer-based coverage even if they
work full-time.3 Without this benefit, the
parents would have to pay substantially more or go without health
insurance. By the time both parents are working full-time, together
earning about $29,000 per year, the family has lost food stamps and
the EITC has nearly phased out. (See Figure 1.)

At the same time, the family faces growing transportation and
child care expenses. Combined with reduced work supports, this
means that additional earnings do not always improve the
family’s financial situation. Initially, increased earnings
do bring the Chases closer to the goal of covering a basic family
budget. With one parent working full-time, earning close to $15,000
per year, the Chases are nearly able to make ends meet (see Figure
2). But when the second parent enters the workforce, the
family’s increased earnings are offset by increased
work-related expenses and declining benefits, including the loss of
food stamps and the phasing out of the EITC. As a result, the
family’s resources continue to hover near the “break
even” point—i.e., the point where resources equal the
cost of basic family necessities—until earnings exceed
$30,000 per year.

Thousands of families in Alabama have resources and expenses
similar to the Chases. There are 239,000 low-income families living
in the state, and 35 percent of them have a preschool-aged child
(under age 6). Among low-income families in Alabama, 81 percent
have at least one parent who works, and 51 percent have a parent
who works full-time, year-round. Thirty-three percent are
two-parent families.

Low Income in Alabama: The Dodges

For a single-parent family in Alabama, providing for a
family’s basic needs is even more challenging. Ms. Dodge is a
single mother living in Montgomery who has one child, age 2. The
federal poverty level for this family is $12,490.4 In this simulation, Ms.
Dodge initially receives Temporary Assistance for Needy Families
(TANF) cash assistance, along with child care subsidies to offset
the cost of care while she works. In addition, like the Chases, the
Dodges receive income tax credits, food stamps, and public health
insurance.

As with the Chases, Ms. Dodge’s work-related expenses
increase as she moves from part-time to full-time employment, and
she loses key work supports long before she earns enough to cover
her family’s basic needs. At $5,000 in annual
earnings—or just $383 per month after deducting payroll taxes
and state income taxes—the family is no longer eligible for
TANF cash assistance, and Ms. Dodge has already lost public health
insurance coverage (although her child remains covered). This
simulation assumes that like most low-wage workers, Ms. Dodge does
not have employer-based coverage, so the loss of public health
insurance leads to a sharp increase in the family’s basic
budget (see Figure 3).

In addition, Ms. Dodge does not qualify for child care subsidies
at this earnings level. In Alabama, parents must work a minimum of
15 hours per week to be eligible for child care assistance. This
simulation assumes that at $5,000 in annual earnings, Ms. Dodge is
working 12 hours per week (at a wage rate of about $8 per hour5). Ms. Dodge saves some
money by placing her child in family care, rather than in a child
care center, while she works.

As Ms. Dodge continues to increase her work effort and earnings,
the gap between family resources and expenses begins to shrink.
However, even with work supports and a full-time, year-round job
paying roughly $8 per hour—$3 per hour above the minimum
wage—Ms. Dodge does not have enough money to provide for her
family. The Dodges’ resources do not exceed the cost of basic
expenses until Ms. Dodge’s earnings increase to $23,000 per
year.

This means that Ms. Dodge is not able to makes ends meet until
she earns almost $13 per hour. Even at this wage, she is unable to
afford anything beyond her family’s basic necessities,
despite the fact that the family continues to receive a small EITC
benefit, and the children are still covered by public health
insurance. At $23,000 in annual earnings, the Dodges are also
eligible for child care assistance. However they have dropped out
of the program because the required family co-payment of $314 per
month is slightly more than the (unsubsidized) cost of full-time
care in a family child-care home.6

Challenges for Policymakers

Federal and state budget woes threaten existing work supports
for low-income families. Since early 2003, nearly half of the
states have taken steps that reduce eligible children and
parents’ access to public health insurance, such as raising
premiums, increasing reporting and verification requirements,
and/or implementing enrollment freezes. Similarly, over the past
few years, most states have restricted family access to child care
subsidies by lowering income eligibility limits, increasing family
co-payments, and/or placing eligible applicants on waiting lists.
As of early 2004, more than 14,000 children were on a waiting list
for child care subsidies in Alabama.7 Many of these changes hit
families just above the poverty level the hardest. At the same
time, job creation has been slow. As policymakers respond to the
difficult choices they face, understanding the impact of public
policies on the resources and work incentives of low-income working
families is critical.

2. The analysis in this report is based on tax and benefit policies in effect in December 2003; the 2003 poverty level for a family of four was $18,400. See the U.S. Department of Health and Human Services for more information about federal poverty measures.

3. The percentage of employees that receive health benefits at work has steadily declined in recent years. According to the March 2003 National Compensation Survey, among employees in the private sector, only about half receive medical care benefits through their employers, and the rate is lower among employees with wages of less than $15 per hour. See: U.S. Bureau of Labor Statistics. (2003). Employee benefits in private industry, Table 1: Percent of workers participating in health care and retirement benefits, by selected characteristics, private industry.

4. The 2003 federal poverty level for a family of three was $12,120. See note 2.

5. Given research indicating that persons leaving TANF cash assistance for employment typically earn more than the minimum wage, the Simulator assumes that parents earn the 20th percentile wage when they enter the workforce. In Alabama, the 20th percentile wage is $8.08 per hour. See: Mishel, L.; Bernstein, J.; & Allegretto, S. (2004). The state of working America, 2004/2005 (An Economic Policy Institute Book). Ithaca, NY: Cornell University Press.

6. The Simulator estimates the costs of care based on the maximum provider payment rate in the state’s Child Care and Development Fund (CCDF) subsidy program.